« What's the Rate Today? (Use a Crystal Ball or....) | Main | And for those SFH Investor Clients...PMI, FICO Rules, etc. »

Do Rates Drop After a Presidential Election?

(This article came to me from an anonymous loan officer) elect2008.gif

No political views are intended in this email. This is for information purposes only and is intended to help you discuss this topic with your clients!

Not only do I like this article, but it reminds us that present rates are so good compared to any other time in recent history.


Do Rates Drop After a Presidential Election?

Everyone is buzzing about the prospect of lower mortgage rates after the Presidential election. Is there any truth to the rumor that mortgage rates drop after Presidential elections? What about changes in trends?

It's important to note a few things about the history of mortgages in the U.S. before I explain why....

..... I am only going back to 1972. For starters, this is as far back as I could find data on 30 Year Conventional mortgage rates.

Also, Fannie Mae did not begin purchasing Conventional loans from banks until 1972.

And since the price of mortgage securities is the primary factor in determining rates, it only makes sense to compare how those rates reacted to elections held since this fundamental change occurred in the mortgage market.


6 months prior - 7.37%

3 months prior - 7.40%

Election month - 7.43%

3 months after - 7.44%

6 months after - 7.65%

VERDICT - Rates increased slightly after the election. They also began a long upward trend after this six months shown here.


6 months prior - 8.77%

3 months prior - 9.00%

Election month - 8.81%

3 months after - 8.67%

6 months after - 8.82%

VERDICT - Rates fluctuated slightly before the election, dipped only slightly in the three months after and then basically returned to pre-election levels after six months. However, they began a very sharp upward trend in the months and years following this six months after the election.


6 months prior - 14.26%

3 months prior - 12.56%

Election month - 14.21%

3 months after - 15.13%

6 months after - 16.40%

VERDICT - Rates increased sharply in the months after the election, but the trend began way before election day. It's important to note that inflation was out of control during this period and the Federal Reserve was basically forced to increase short term rates to the point of forcing the country into a recession to get inflation under control. Although the Fed does not directly control mortgage rates, a steep, prolonged increase in Fed rates will have a long term impact on mortgage rates.


6 months prior - 13.94%

3 months prior - 14.47%

Election month - 13.64%

3 months after - 12.92%

6 months after - 12.91%

VERDICT - Rates did decrease after the election, but this was in the middle of a long downward trend in interest rates in general They decreased substantially in the two years following this election.


6 months prior - 10.46%

3 months prior - 10.60%

Election month - 10.27%

3 months after - 10.65%

6 months after - 10.77%

VERDICT - Rates dipped right around election month and then quickly returned to the same level they were prior to the election. Overall, mortgage rates decreased during Bush's term.


6 months prior - 8.67%

3 months prior - 7.98%

Election month - 8.31%

3 months after - 7.68%

6 months after - 7.47%

VERDICT - Rates did decrease after the election, but again, this was a long trend that began well before election day Ultimately, rates dropped, increased and then dropped again and ended up about the same at the time of the next election.


6 months prior - 8.07%

3 months prior - 8.00%

Election month - 7.62%

3 months after - 7.65%

6 months after - 7.94%

VERDICT - Rates dipped around the time of the election and then increased to nearly the pre-election level after six months. Rates fluctuated during Clinton's second term and ultimately settled at about the same level they were on election day.


6 months prior - 8.52%

3 months prior - 8.03%

Election month - 7.75%

3 months after - 7.05%

6 months after - 7.15%

VERDICT - Rates did decrease after the election. The trend began several months before election day and continued throughout much of Bush's first term.


6 months prior - 6.27%

3 months prior - 5.87%

Election month - 5.73%

3 months after - 5.63%

6 months after - 5.72%

VERDICT - Rates were on a downward trend before election month, dipped slightly after and then returned to almost the exact level after six months. Over the course of the next four years, rates had some volatility but remained low and in a tighter range than in the past.


Let's take a look at the rate trend so far year to date:

Jan - 5.76%

Feb - 5.92%

Mar - 5.97%

Apr - 5.92%

May - 6.04%

Jun - 6.32%

Jul - 6.43%

Aug - 6.48%

Sep - 6.04%

The trend of rates has been pretty steady so far this year. We are within .25% of where we began in January with the largest spikes happening in the summer months. The bailouts definitely caused a restoration in confidence among investors of mortgage-backed securities, but the effect of this news has already been priced into rates. In fact, rates have almost completely returned to levels prior to the Fannie/Freddie announcement.

And having said that, I firmly believe there's no direct correlation between elections and mortgage rates.

Historically the data doesn't prove this, nor does it even show an immediate change in trends before or after most Presidential elections.

That's not to say that Presidents and their policies don't have an effect on the economy and ultimately mortgage rates. They can and they do. But many, many other factors also affect mortgage rates, and those can't be changed overnight by one person.

The policies of the President are one factor in a sea of economic trends and monetary policies of many governments and countries that ultimately affect rates.

However, this election may turn out to be different since we're in the midst of the worst financial crisis in generations.

The markets may ultimately react wildly to the news of whoever ultimately wins the election. I believe the result will be temporary, and the markets will adjust accordingly to the changing fundamentals of the new market ahead of this major correction.

For example, if the stock market were to have a knee jerk reaction the day after the election (say a 800 or 1000 point swing, which I feel is certainly a possibility), rates could certainly also follow suit, but I firmly believe they would return to their normal trends, which are governed more so by longer term patterns and factors within the economy as a whole.

So don't be surprised if interest rates don't move much in the months after the election.

And don't be surprised if they do.

I've heard some predictions of rates back in the low 5% range, and I have a hard time believing this (but I've been wrong before).

Many economists are predicting the Fed will again lower the Federal Funds rate sometime soon. Eventually this may lead to higher mortgage rates if the Fed's actions lead investors to fear inflation, or if the credit crisis will ultimately result in higher borrowing costs for the U.S. Treasury.

Since inflation fears mean higher bond yields, that usually means mortgage rates also increase.

And of course, the global credit crisis will definitely have an impact on the direction of rates, and we do not yet know when the end of this economic challenge will finally come.

The cycle we're entering is literally uncharted territory, and the impending nationalization of many financial institutions may change the market fundamentals in the future.



This page contains a single entry from the blog posted on November 3, 2008 3:41 PM.

The previous post in this blog was What's the Rate Today? (Use a Crystal Ball or....).

The next post in this blog is And for those SFH Investor Clients...PMI, FICO Rules, etc..

Many more can be found on the main index page or by looking through the archives.

Powered by
Movable Type 3.34